Sebi wants to shift to T+1, with settlement of trade on the next day, from T+2 now. It has said that exchanges have the option to switch to this system from January 1 next year for select stocks. Investors who buy shares from the Indian equity market currently get delivery two days from the date of trade. Sebi wants it to shorten this to one day to improve market efficiency. FPIs have been complaining that such a shift would need a significant revamp of their current compliance and execution systems.
Sebi didn’t respond to queries.
“Neither FPIs nor their custodians in India were consulted before the Sebi circular was issued on September 7,” Eugenie Shen, managing director, head of the asset management group at ASIFMA, told ET.
‘Risk of Failed Trades Rises’
“ASIFMA had written to Sebi about our members’ issues with T+1 as far back as last October but Sebi has not responded to our request for a meeting,” Shen said.
In the letter, ASIFMA and other lobby groups cited the example of the US Securities Exchange Commission (SEC). The SEC gave market participants two years to put systems in place when it wanted to shift from T+3 to T+2 settlement. Sebi has given them less than four months, they said.
“We strongly urge Sebi to delay the coming into effect of the circular that is scheduled for January 1, 2022, so that all stakeholders have sufficient time to identify, come up with, test and implement the operational processes and procedures required to safely implement a T+1 settlement model in India,” said the letter addressed to Tyagi.
ET had reported on September 10 that Sebi was unlikely to budge on T+1 settlement. The regulator is of the view that the move will help thousands of retail investors and that FPIs don’t face any major challenges – all they need is to tweak internal systems.
FPIs have argued that T+1 will require foreign funds to pre-fund their India trades. Currently, an FPI makes a trade on T and then sends the money to the custodian by T+1 afternoon, after which the custodian confirms the trade with clearing corporations. However, under T+1 settlement, FPIs say, they will have to send the funds beforehand since the trade has to be confirmed by the custodian on T itself. Sebi has brushed off this argument, saying FPIs are anyway pre-funding derivative and primary market transactions.
In the latest letter, FPIs have raised a new point pertaining to failed transactions, adding that stock exchanges and Sebi should seek their views before issuing operational guidelines in this regard.
“It is important also to bear in mind risks not only to investors but also to brokers, custodians and other market participants arising from failed trades or failed settlement that may impact the market as a whole due to the shortened settlement timeframe,” the letter said.
Shen said the risk of failed settlements increases due to the shorter settlement cycle.
“If a trade doesn’t get confirmed by the settlement date, under the current system, the obligation falls on the broker and given that local brokers are generally less capitalised, this may give rise to increased systemic risk,” Shen said.
The offshore funds have cited global examples to make their case, including Taiwan, which moved from T+1 to T+2 settlement in February 2009. Mainland China is the only Asian market currently following T+1 settlement. However, when MSCI added mainland China shares to its indices, it only selected those being offered under T+2 settlement. “T+1 in Asian markets is a big problem for FPIs because it is already T for US and European investors as India is at least 8-16 hours ahead of Europe and the US,” Shen said.
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